Flooding can strike at any time, leaving a path of destruction and damage behind for people, communities, and states to contend with. Recent flooding in Middle Tennessee exemplifies how quickly flooding can uproot communities: 17 inches of rainfall in under 24 hours killed at least 22 people, devastated numerous homes and buildings, downed power lines, and dilapidated roads. And, last week, Hurricane Ida brought widespread flooding to communities between New Orleans and New York City. Although it will take some time before we know the full extent of the damage caused by Ida, the final figure will surely be astronomical.
Flooding can be financially devastating to households – just one inch of rain can cause $25,000 of damages to an average home. And flooding threatens communities regardless of whether they sit near a coastline; in the last 25 years, 99% of U.S. counties have been damaged by a flooding event. As extreme rainfall and flash floods intensify and become more frequent, people must manage the risk that flooding poses to their property and take proactive measures to support a quick recovery in the event of a disaster.
That’s where flood insurance comes in. Flood insurance can help individuals, businesses, and communities prepare for and recover from disasters by protecting buildings and belongings when flooding strikes. Next month, to further help communities adapt to this reality of more frequent flooding, the Federal Emergency Management Agency (FEMA) will implement a series of changes to the National Flood Insurance Program (NFIP).
The most important changes will be a new methodology for pricing flood insurance, called Risk Rating 2.0, which will ensure that flood insurance rates reflect an individual property’s risk, while reducing premiums for many policyholders across the country.
If you are:
Then take five quick minutes and read on. In this article, we will introduce the basics of flood insurance, Risk Rating 2.0, and other steps to reduce flood risk. Risk Rating 2.0 will modernize NFIP by ensuring flood insurance rates are based upon each individual property’s risk to flooding and improve equity by reducing insurance premiums for policyholders who are currently paying more than their fair share for flood insurance.
Before we dive into the ins and outs of Risk Rating 2.0, we’ll first cover the basics of flood insurance. Flood insurance covers buildings and belongings impacted by water damage specifically due to flooding.
Although FEMA manages the National Flood Insurance Program, people generally buy their NFIP policies through private insurance companies — the same companies that sell homeowners and car insurance. As most homeowners or renters insurance does not cover flood damage, policyholders within flood zones must purchase flood insurance, in addition to homeowners or renters insurance.
Average costs for flood insurance vary by state — from a low of $600 per year in Florida to a high of $1500 in Connecticut. The average annual flood insurance premium is about $700. Annual flood insurance premiums may change from year to year, as part of a gradual process to make premium rates reflect accurate flood risk. Current law limits rate increases to no more than 18% per year. Known as a premium cap, this rate limit ensures that policyholders do not unexpectedly face a full raise in premium cost in a single year.
The federal government requires that homes in high-risk flood areas backed by a federal mortgage are protected by flood insurance. To see whether a property lies in an area that triggers the mandatory purchase requirement, visit FEMA’s Flood Map Service Center or the First Street Foundation’s Flood Factor tool.
Flood insurance is also a good idea for homeowners living outside these zones: Between 2015 and 2019, more than 40% of NFIP flood claims came from properties outside the high-risk flood areas. Although programs like FEMA Individual Assistance (IA) can provide financial help and direct services to help after a presidential disaster declaration, average IA payments pale in comparison to the average NFIP claim. After Hurricane Harvey in 2017, the average NFIP claim was about $116,800 while the average IA payment was only $4,400. Purchasing a flood insurance policy is one of the best ways that individuals can protect themselves from the financial impacts of a flood disaster.
The bottom line: floods are financially devastating, and are capable of tearing apart properties and communities overnight. But with flood insurance, people have peace of mind that they can have the resources to recover if faced with a disaster.
On October 1, 2021, FEMA will unveil Risk Rating 2.0, essentially updating NFIP to focus more on individual property risk, which will reduce premiums. This is the first time in over 50 years that FEMA has significantly adjusted the methodology for pricing flood insurance premiums for NFIP.
Currently, FEMA’s rating methodology is a “one-size-fits-all” approach that prices flood insurance based on which flood zone a property is mapped in by FEMA. Practically, this means that two houses located right next to each other could have vastly different insurance premiums if they are mapped in different flood zones by FEMA.
Under Risk Rating 2.0, flood insurance rates will be decided at the individual property level in an effort to give policyholders a more accurate and transparent picture of flood risk for their home.
For the first time ever, FEMA is changing the way it prices flood insurance. FEMA will now consider new factors when calculating flood insurance rates, including the different types of flooding that impact a property (including riverine and flash flooding), the distance a property is from a source of flooding like the coast or a river, and the cost to rebuild or restore that property. This update will create unique insurance rates that accurately reflect an individual property’s risk. Because homeowners and renters will pay for their own individualized risk, the system will be fairer.
Some elements of flood insurance will not change with Risk Rating 2.0. For example, the mandatory purchase requirement will still be in place, along with the premium cap that limits rate increases to no more than 18% per year.
Currently, policyholders on average see premium increases of $8 per month. With Risk Rating 2.0, 89% of current policyholders will see their premiums either immediately drop or increase by no more than $10 per month, according to estimates by FEMA. In other words, almost everyone who pays for flood insurance right now will see a lower rate under Risk Rating 2.0, or will only see a very small change in their monthly premium.
Under FEMA’s current rating methodology, policyholders with lower-valued homes are paying more than their share of the risk while policyholders with higher-valued homes are paying less. This is because FEMA does not currently consider in its pricing calculation the costs required to rebuild a home if it needs to be replaced. Homes with higher values cost more to reconstruct, so Risk Rating 2.0 improves equity by ensuring home values and premiums are aligned with a property’s actual risk.
Risk Rating 2.0 will be implemented starting October 1, 2021. Current NFIP policyholders can contact their insurance company or insurance agent to learn more about how Risk Rating 2.0 affects their property. Within the next month, Risk Rating 2.0 will be on the table for many property owners:
Though incredibly important, buying flood insurance is only one way to prepare for floods. Communities can also invest in efforts that reduce flood risk. And these efforts can pay off with both reduced damage and reduced premiums.
Because mitigation efforts to properties — such as elevating a building or installing proper flood openings in a crawlspace — help reduce flood damage, FEMA incentivizes such efforts with reduced premiums for NFIP policyholders. One study found that for elevating a structure in New York City, the average annual premium drops from $10,500 to $600; for basement infill, premiums can drop from $4,400 to $820.
To reduce the potential impact of flood insurance costs, local leaders can enroll their municipality in FEMA’s Community Rating System (CRS) program. Through direct reductions in federal flood insurance premiums, CRS gives local communities credit for taking steps to reduce flood risk. This program allows local leaders to deliver flood insurance cost reductions directly to most, if not all, residential flood insurance policyholders in their community.
Communities can earn National Flood Insurance Program rate discounts of 5–45%, based on the CRS classification. For more on CRS, read our blog post on how communities can protect property values.
The American Flood Coalition created the Flood Funding Finder, an interactive website that uses a robust filtering system to prioritize the needs of small communities and help them identify the right federal funding programs to fund flood resilience.
The Flood Funding Finder features programs like FEMA’s Flood Mitigation Assistance program, which communities can use to support structure elevation projects to mitigate flooding and in turn potentially reduce flood insurance premiums.
AFC’s Adaptation for All guide can also help local leaders determine the approaches to flooding or sea level rise that can work best for them. Drawing on examples from the U.S. and the Netherlands — a country with a long history of flood challenges and innovations — this guide highlights 26 approaches that can help communities of any size determine the projects that best fit their flood resilience strategies.
Flood insurance is a cornerstone for building a culture of preparedness and resilience, especially when paired with complementary efforts to reduce vulnerability to flooding. The upcoming changes to federal policy in Risk Rating 2.0 will make insurance costs more accurately reflect risk, while also creating a fairer system. While flood insurance does not physically protect property from floodwaters, purchasing a NFIP policy is the best way that individuals can prepare ahead of time to recover quickly after a flood disaster.
